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CARES Act Alert 4.14.20

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CLIENT UPDATE: Treasury announces new interim final rule concerning additional eligibility criteria and requirements for certain pledges of loans as to the Paycheck Protection Program (“PPP”).

Today, Treasury issued an interim final rule that supplements the CARES Act and prior interim final rules with respect to PPP loans. This new rule provides additional guidance for individuals with self-employment income who file a Form 1040, Schedule C. The rule also addresses eligibility issues for certain businesses and requirements for certain pledges of PPP loans.

Highlights include:

  • Individuals with self-employment income who file a Form 1040, Schedule C are generally eligible for PPP loans, but partners in a partnership cannot submit a separate PPP loan application for themselves; rather, self-employment income of general active partners is to be reported as a payroll cost on a PPP loan application filed by or on behalf of the partnership
    • Thus, a partnership and its partners (which includes LLCs that file taxes as a partnership) are limited to one PPP loan
  • Clarifies the method of calculating the maximum amount of a PPP loan for self-employed individuals, which depends upon whether they employ other individuals
  • Limits use of PPP loan proceeds for self-employed individuals to cover only certain expenses, including: owner compensation replacement (calculated based on 2019 net profit); employee payroll costs; and mortgage interest payments on any business mortgage obligation on real or personal property, business rent payments, and business utility payments, but only if these expenses were claimed (or the taxpayer was entitled to claim) a deduction for such on the 2019 Form 1040 Schedule C
  • Requires that at least 75% of the PPP loan proceeds to self-employed individuals be used for payroll costs, which includes the amount of any refinanced EIDL
  • Limits the amount of forgiveness of a PPP loan for self-employed individuals in several ways, including by limiting the forgiveness of owner compensation replacement to 8 weeks’ worth of 2019 net profit, and requiring that 75% of the amount forgiven be attributable to payroll costs
  • Permits otherwise eligible businesses owned by directors or shareholders of a PPP Lender to apply for a PPP loan through the Lender with which they are associated under certain circumstances and depending upon the amount of control, so long as the Lender shows no favoritism
    • However, officers and key employees of a PPP Lender cannot obtain a PPP loan from the PPP Lender with which they are associated
  • Businesses that receive revenue from legal gaming are eligible for a PPP Loan so long as the existing standard in 13 CFR 120.110(g) is met, or the following two conditions are satisfied: (a) the business’s legal gaming revenue did not exceed $1 million in 2019; and (b) legal gaming revenue comprised less than 50% of the business’s total revenue in 2019
  • The requirements for loan pledges under 13 CFR 120.434 do not apply to PPP loans pledged for borrowings from a Federal Reserve Bank or advances by a Federal Home Loan Bank

The full rule can be found at: https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf.

Wadleigh’s COVID-19 Response Team will continue to monitor announcements from Treasury as additional guidance is released.